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52. External Capital Flows and Policy Challenges in the ASEAN Economies
- ISEAS–Yusof Ishak Institute
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External Capital Flows and Policy Challenges in the ASEAN Economies 249 By: ROS Size: 7.5" x 10.25" J/No: 03-14474 Fonts: New Baskerville 52. EXTERNAL CAPITAL FLOWS AND POLICY CHALLENGES IN THE ASEAN ECONOMIES J. MALCOLM DOWLING and NARHARI RAO Reprinted in abridged form from J. Malcolm Dowling and Narhari Rao, “External Capital Flows and Policy Challenges in the ASEAN Economies”, in ASEAN in the WTO: Challenges and Responses, edited by Chia Siow Yue and Joseph L. H. Tan (Singapore: Institute of Southeast Asian Studies, 1996), pp. 137–58, by permission of J. Malcolm Dowling and the publisher. EFFECTS OF CAPITAL INFLOWS AND MACROECONOMIC MANAGEMENT BY THE ASEAN COUNTRIES Almost all the Asian developing countries which attracted significant capital inflows faced many of the positive and adverse macroeconomic consequences.1 On the positive side, acceleration in the rate of growth of GDP is evident for several countries during the capital surge phase. The phenomenon is observed in the case of Malaysia, Thailand, Indonesia, and the PRC. In the case of the Philippines, while significant capital inflows began around 1992, economic growth remained sluggish and only picked up in 1994. In all these economies, acceleration in economic growth became feasible by a combination of policies that restored macroeconomic stabilization and promoted structural reforms in conjunction with higher investment rates. The latter could be attained partly by higher domestic savings on account of ongoing financial sector reforms and partly by the influx of foreign savings. A discernible increase in investment-GDP ratio during the capital inflow phase is observed in Indonesia, Malaysia, the Philippines , Thailand, and the PRC. The three economies that received the largest capital inflows, Malaysia, Thailand, and the PRC, also experienced the largest increase in investment-GDP ratio. Malaysia’s investment rate increased from 28 per cent of GDP in 1989 to 31 per cent in 1990, remained at about 35 per cent over the next three years, and was estimated at 37 per cent for 1994. In Thailand, where capital inflows began in 1988, the investment-GDP ratio jumped from 28 per cent in 1987 to 33 per cent in 1988 and rose further to 35 per cent in 1989. Since then the investment ratio has averaged 40 per cent per annum. A similar trend is observed in the PRC, where in response to large inflows of FDI, the investment-GDP ratio increased almost nine percentage points in 1993, from 34 per cent in 1992 to 43 per cent in 1993. The Philippines also witnessed an increase in the investment ratio during the capital inflows 052 AR Ch 52 22/9/03, 12:50 PM 249 250 J. Malcolm Dowling and Narhari Rao By: ROS Size: 7.5" x 10.25" J/No: 03-14474 Fonts: New Baskerville phase; the ratio rose from 21 per cent of GDP in 1992 to an estimated 25.0 per cent in 1994. Did capital inflows reduce aggregate savings by giving room for an increase in public and private consumption? The evidence on this issue is mixed. Domestic savings as a proportion of GDP increased in Indonesia, Malaysia, and Thailand. Some of the economies (Indonesia, Malaysia, Thailand, and the Philippines) adopted a tight fiscal stance partly by pruning government consumption as a proportion of GDP. In the Philippines there was an increase in private consumption during the capital inflow phase with the result that the overall savings ratio does not show much change, despite a decrease in public consumption . With investment increasing simultaneously, the Philippines experienced a large external current account deficit. The domestic savings ratio in the PRC does not show a discernible increase during 1993 and 1994 when the economy received large inflows of capital. Almost all the economies experienced a significant widening of the external current account deficit during the capital inflow phase due mainly to a sharp rise in domestic investment in relation to national savings. The sole exceptions were Malaysia and the PRC. In 1991, Malaysia’s external current account deficit increased to about 9 per cent of GDP. However, over the next two years, despite a sharp increase in gross domestic investment, the current account deficit was brought down perceptibly as a result of fiscal tightening. The fiscal deficit as a proportion of GDP declined from 2 per cent in 1991 to a mere 0.2 per cent in 1993. The process was further helped by an increase in private savings. However, Malaysia’s current account deficit increased sharply in 1994 due to...